Passive Investing

Posted in Finance, Accounting and Economics Terms, Total Reads: 104

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Definition: Passive Investing

Passive Investing is a long term investment strategy adopted by investors with expectations of high returns in the future. They make few transactions of their financial instruments and wait for a perfect future period for getting their returns.

This type of investors invest after getting proper knowledge and professional guidance from analysts and fund managers about various investment options. They carefully track the investment at regular intervals. They invest in wide sectors of business and diversify their investments. They invest on the basis of the historical data and trends.

Mostly retired and aged individuals adopt this type of investment strategy to secure their investments and get regular returns at fixed intervals.

Advantages for passive investors are:

• Stable and disciplined investment

• Risk averse

• Less transaction costs

• Diversify their risk

The main disadvantages for such investors are:

• They do not take benefit of volatility of the market and earn out of it, instead they play safe and stick with their investments.

• There is no liquidity in their investments as they go for long term investments, so they cannot encash their investments at short intervals.

• They save in terms of frequent transaction costs but also lose in terms of getting unexpected returns from market.

• They are not risk takers but more risk averse.

• There average returns are lower than active investors.

• Even during the bearish market, active investors can remove their money faster compared to passive investors which can sometimes lead to huge losses in their investments.

Even this has such disadvantages but as per report given by Financial Times. Compared to 2013, there is 160% rise in passive investing in 2015 which is due to low fees charged and investors want to safeguard their money from the extremely fluctuating market returns.